GNC tweaks maturity extension amendment to thwart holdouts

NEW YORK, Feb 21 (LPC) - Ailing US vitamin and supplement retailer GNC Holdings Inc has sweetened the terms of a complex amendment to its existing credit agreement to extend a looming March 2019 debt maturity, after early consents from lenders fell short of a required threshold, according to three sources familiar with the transaction.

GNC launched the amendment on February 13, offering fees to lenders of its US$1.13bn leveraged loan to push out the maturity by two years to March 2021, in order to buy the company additional time to stage a turnaround.

Goldman Sachs is advising on the amendment, while JP Morgan is administrative agent.

The proposal marks the fourth time since May 2017 that the company has attempted to refinance the loan and stave off a default. The previous efforts were scuttled by investors concerned about GNC’s slumping sales as brick-and-mortar retailers struggle in the face of online competitors.

The amendment request comes alongside an announcement that the company has struck a deal with Chinese company Harbin Pharmaceutical Group Holding (Hayao) regarding a US$300m convertible preferred equity investment and a joint venture for manufacturing and distributing GNC products in China.

The proceeds from the investment will be used for general corporate purposes and to pay down debt.

The investment is contingent upon 90% of the loan extending the maturity date, according to regulatory filings.

HOLDOUT DILEMMA

Under the terms of the amendment, lenders consenting by last Friday’s early deadline could have chosen to exchange 20% of their loan holdings for cash, extend the remaining 80%, and receive a 150bp amendment fee.

Alternatively, they could have opted to convert their holdings into a pro rata portion of a new US$275m five-year first-in, last-out (FILO) term loan – which would have a higher priority claim – and extend the remaining portion, for which they’d receive a 250bp fee.

Once that offer expired, the proposal changed to offer lenders 20% of their holdings in the FILO loan or cash and an extension of the other 80%, with the fee dropping to 150bp.

The company gathered consents from around 81% of the loan by the early deadline, as some lenders are resisting extending because they instead want to receive 100 cents on the dollar for their holdings or haven’t voted, the sources said. Chinese bank lenders on vacation for the Chinese New Year are among those that haven’t voted, they added.

In order to eliminate holdouts, the company is driving consenting lenders to buy the loan in the open market and offering them the 250bp fee on the additional amount they purchase and vote in favor of the extension.

The strategy aims to push bids on the loan in the secondary market higher and incentivizes holdouts to sell.

The loan is currently bid at around 97 cents on the dollar, two of the sources said.

“Non-voted paper could be worth more now depending on the buyer,” one of the sources said.

To compensate for credit risk, pricing on the extended tranche will be boosted to 875bp over Libor with no Libor floor, from 250bp over Libor with a 0.75% Libor floor on the existing loan, provided that it is rated B2/B or higher within three months after the amendment closes, filings show. If the ratings are lower, pricing will increase to 925bp over Libor.

If the extended tranche is rated Ba3/BB- or higher or the company makes prepayments of at least US$275m on the secured debt, the coupon will drop to 825bp over Libor.

The loan has preliminary ratings of B3/B-.

The FILO loan will pay 700bp over Libor, with a step-down to 650bp over Libor if its ratings are at least Ba3/BB-. The FILO loan has preliminary ratings of Ba3/B.

Extending lenders are also set to receive a duration fee of 200bp on the extended amount either five business days after the company enters an asset sale or issues equity netting proceeds in excess of US$150m, or on March 4, 2019, when the non-extended tranche matures, whichever comes first.